Spark Capital Launches Startup Seed Fund

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[Updated with interview material from Spark Capital general partner Bijan Sabet, see below.]

It’s almost the equivalent of the “microloans” phenomenon for the venture world: the profusion of startup schools, bootcamps, incubators, and seed funds that give teams small amounts of money—from a few thousand dollars to a few hundred thousand—to get their ideas up to speed and test them in the market before they need more serious capital. Boston’s Spark Capital, whose portfolio focuses on social media, entertainment, and network infrastructure companies, is the latest to join this trend.

Spark announced this morning that it’s launching Start@Spark, a program that will offer seed-stage investments of up to $250,000 to promising early-stage startups in the New York and Boston areas. And by mid-afternoon it had already received a “slew of e-mails” with proposals, according to Spark’s Bijan Sabet.

“In this economic environment, continued innovation and entrepreneurship are as important as ever,” Spark founder and general partner Todd Dagres said in this morning’s announcement. “Looking back at previous recessions, some of the greatest technology companies were created and achieved market success during turbulent times. We view Start@Spark as an opportunity to not only buck the trend of investors retreating from new early stage funding but also to capitalize on what may be a perfect storm for the next great technology company to take root.” (We’re working on contacting Dagres directly.)

Spark said the seed investments will be available to companies working on technologies at all stages of the “media and technology value chain”—content, applications, platforms, and infrastructure. In that respect, Spark seems to be looking to help create more hot startups along the lines of its current portfolio companies Eqal (the multimedia studio behind the “lonelygirl15” Web series), Twitter (the famous microblogging service), Tumblr (a simplified blogging platform), Kickapps (a builder of white-label social networks), and Verivue (a broadband video delivery company).

Spark is already a supporter of the incubator model: it provides support for TechStars, a Boulder, CO-based startup bootcamp that will operate a parallel Boston session starting this summer. But while Start@Spark doesn’t sound like a full-scale incubator on the TechStars or Y Combinator model, the firm says companies that win seed funding will have access to Spark partners and legal counsel. Spark hasn’t said what the terms of the seed investments will be—for example, whether the funded startups will somehow be obliged to offer Spark equity.

Startup builders can apply for the Spark program online at www.sparkcapital.com/start. The firm says applicants will be judged on “creativity, thought-leadership, wide-reaching but focused ideas and the qualifications of the founding team.”

Update, 3:30 p.m. March 25, 2009: I just spoke with Spark general partner Bijan Sabet about Start@Spark. Here are the key quotes.

On why Spark is doing this:

“By and large, we mostly do early-stage investing. We’ve done later-stage investing as well, but typically we are part of the first institutional round for our companies. The investments range from the $350,000 we put into Tumblr to get it going, to something close to that for Oneriot and Admeld, to other Series As that are larger—we did $1 million with OMGPOP a year ago. So we’ve done a bunch of early-stage investing. And in this market we continue to see a few trends that are clear to us. Many funds are getting bigger and bigger, and in the Northeast in particular, there is nothing like this that we’ve seen. On the West Coast they have some of these programs, but we don’t see them done here. A very active angel and seed investing community is an important part of the ecosystem. So we felt it was the right time to do this…This is very much focused on New York and Boston, at least for now.”

On Spark’s larger efforts to reach out to early-stage startups:

“One thing that we’re trying to promote is that this is one component of a larger initiative that we’ve termed Start@Spark. The seed part is the newest part of that offering, but we include in this thing the Alliance for Open Competition, which is our effort to get rid of non-compete agreements, and our investment in TechStars, and some community things that we’re trying to do that really focus on entrepreneurs.”

On the response to the seed investing program so far:

“It’s amazing. Just today, I’ve gotten two public comments on my blog with proposals, and a slew of e-mails that have come in just since this morning. We are going to have a lot of evening reading. I haven’t gone through them, so I can’t tell you whether any of the day-one applicatnts are going to get capital from Spark. But I just feel that angel and seed-stage investments play a very important role. Even before the economic collapse, the Northeast didn’t have the strength of the angel network that the West Coast has. We have some very good angel investors, but they aren’t nearly as active and comprehensive as the angel network on the West Coast.”

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

It is unfortunate that an entrepreneurs idea is only as good as its funding. After four start ups, I am well aware of the value behind minimizing expenses and getting to market quickly before costs get in the way. However, If large scale ideas first need capital then an entrepreneur needs to move focus away from his core idea and figure out how to raise the minimal necessary funds. A young business will expend a disproportionate amount of time on learning all about how to first learn about how investments are structured, pitching their idea and then being evaluated by investment groups – rinse and repeat. In this down economy, VC and Angel firms are holding out on deals because they can win better terms by extending negotiations. By design, the entire process of raising capital slows innovation.

I propose new open methods to remove the perceived risk aversion to investing in innovation. Clearly, the rate of innovation is rapidly increasing. Access to capital must proportionally ease. Otherwise, growth will be held captive by an innovation capital bottleneck and ideas will not be funded. The solution is to provide open tools and guidance used by entrepreneurs to sharing with capital investment firms to evaluate and manage risk.

A new dawn of accelerated investment should do the following:

1. Allow investments to come from those who are not an Accredited Angel Investor as defined by the SEC in Rule 501(a) of Regulation D under Rule 144 of the Securities Act [either (a)net worth of $1,000,000 or (b) annual income of $200,000]
The reason being, passionate people and young minds want to finance new ideas but this rule says that only 0.15% of the global population can invest this way. (World Wealth Report 2007 {http://www.capgemini.com/resources/thought_leadership/world_wealth_report_2007/}

The solution here could be creating a new investment company with numerous share holders all voting on what opportunities to take. Risk is offset with a basket portfolio. Exposure is monitored because funding is cut if monthly or quarterly numbers are not met.

2. Provide 3rd party tools to monitor key performance metrics of investments.
Audited elements of a business reduce the due diligence cycle needed by each investment firm, gear the company to think about moving their performance indicators up and to the right. Audits could be performed against accounting, all code from architecture and components through unit and user testing, business contracts to forecast future revenue. Each of these keeps entrepreneurs engaged in moving forward. The 3rd party will offer insight into how successful the business may be and how much money is needed.

3. Publish open courseware for learning the skills demanded by a business world constantly iterating.

In principle, privacy will always be respected so that a young company only releases information to those trusted. Ideally, these points enhance open source problem solving and get us closer to open source execution.

By opening up early stage capital, more ideas will get to the next level. Traditional investment groups will now compete out in the open against public attitudes. More accountability will be placed on fair terms and producing ideal results for the good of all rather than the profit of few. The formula for success will be understood by a greater audience and can be adopted for Internationalization. Beyond the hubs of innovation in Israel, Vancouver, Munich, Cape Town, Dublin, San Francisco and others, the aim is to provide access to all regardless of geographic location. Innovation should be born from ideas not elite regions of the globe.

Increasing the rate of invested capital allows tomorrows entrepreneurs to focus on developing future technologies and the business models to monetize them.